Annuity providers Just Retirement and Partnership Assurance Group have agreed to merge, creating a firm worth £1.7bn.
The new company will be named JRP Group, around 60% of which will be owned by Just Retirement and approximately 40% will belong to Partnership.
The firms said the merger would "deliver significant strategic and financial benefits" for the combined business. It said the deal would help strengthen its services and would also enhance the combined company's ability to develop and accelerate new product launches.
"This is of critical importance given the greater expectation of new products among customers following the freedom and choice introduced by the 2014 pension reforms," said the firms in a statement.
Under the terms of the merger, Partnership shareholders will receive 0.834 shares of the combined group for each share held.
The new company will be led by Rodney Cook as group CEO, currently chief executive at Just Retirement. Steve Groves, the current CEO at Partnership, will step down once the merger is complete.
Chris Gibson-Smith, chairman at Partnership, said the firms' intellectual property such as mortality datasets and underwriting expertise would "deliver better value products and improved customer outcomes".
Tom Cross Brown, chairman at Just Retirement, said the two businesses would be "bigger, stronger and more efficient together", which would deliver better returns to both policyholders and shareholders.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the deal was "hardly surprising".
"The retirement income market has changed fundamentally since the budget of 2014," he said. "The majority of smaller pension pots are simply being cashed in, drawdown demand has increased significantly and at the same time, the proportion of customers shopping around the market for the best annuity deals still isn't increasing. Given these factors and the similarity of their business models and strategies, it is hardly surprising to see these two companies merging."
Buck Consultants at Xerox said insurers such as Just Retirement and Partnership had seen "significant reductions" in individual annuity sales because of the changes announced in the 2014 Budget.
The firm said: "The merger could impact price competition, though traditional insurers are also willing to compete in this market. It is not likely to impact overall capacity, which will benefit from new entrants such as Scottish Widows who have recently entered the bulk annuity market. It may, however, limit the choices available to trustees, particularly for smaller schemes."
The deal is expected to be complete in December, subject to regulatory approvals.